REPENSANDO LA FIGURA: UNA SOMERA PROPUESTA

The programme aims to further build on a number of institutional and legal measures taken over recent years to strengthen the budgetary framework and tax administration. These include the new Fiscal Code and Fiscal Procedures Code, which ensure greater transparency and stability of tax legislation and administration, as well as the establishment of the National Agency for Fiscal Administration, which is responsible for the unified collection, audit and enforcement of social security contributions. Also, a new Public Finance Law was adopted, which modernises the budgetary framework for central government, inter alia by elaborating indicative multi-annual budgets, setting expenditure ceilings for all budgetary agents and making use of budgetary reserve funds. This was complemented by initiating a process of fiscal decentralisation, which increases the fiscal autonomy of local authorities in terms of raising revenues. While these measures are likely to continue to contribute to an improvement in revenue collection, the programme puts little emphasis on a clear medium-term expenditure

framework needed for redirecting public expenditure towards human capital, infrastructure and administrative capacity. Such a framework could link the budget execution more concretely to a comprehensive strategy of re-allocating public spending, inter alia by increasing the role of the multi-annual budgetary framework. This would facilitate the decision-making process, improve time consistency and contribute to sufficient flexibility on the expenditure side of the budget, thereby avoiding the pitfall of rapidly increasing primary deficits when the favourable cyclical conditions come to an end. The framework could also comprise strengthened mechanisms for effective control over line ministries’ budget execution during the budget year and the progressive use of performance based budgeting. In combination with stricter overall expenditure control, inter alia by resisting the temptation to use the frequent budgetary rectifications to increase expenditure in line with unexpectedly high revenues, this would facilitate a lasting budgetary consolidation and limit pro-cyclical budget interventions. Being an overarching policy document, the PEP itself could become an important element in the formulation of such an expenditure framework.

The programme also envisages to make the allocation of public expenditure more conducive to the real convergence process and to improve the quality of physical infrastructure and institutions. Compared to last year’s submission, additional information in relation to the functional distribution of public spending is provided according to ESA 95 standards, but some estimate for the allocation of public expenditure on main sectors would have been useful. Although the information is not sufficiently detailed to fully assess the extent to which the composition of public expenditure and revenue supports the programme’s strategic priorities, the programme reflects an increasing awareness of the role that public finances can play in enhancing potential output. A substantial increase in public investment is the main factor explaining the increase of public expenditure over the programme period. According to the programme, investment will be driven by the financing of environment, rural development and infrastructure projects, part of which is the implementation of a very costly motorway programme.

Subsidies, social transfers other than in kind and social benefits are expected to decline considerably as a share of GDP over the programme period, although adequate resources for social protection measures remain a priority. Given the many needs for social improvement and the observed difficulty in recent years to limit the growth of transfers and subsidies to the rate initially planned, a more precise description of measures planned would have been welcomed. Funding for education is set to increase, but the programme does not explain the extent to which this is due to the wage hikes agreed in 2004. The programme aims at increasing public R&D expenditure to 1% of GDP in 2007, which in the light of current R&D expenditure just above 0.4% of GDP in 2004, around half of which was financed by businesses or from abroad, would constitute a major effort to strengthen the knowledge base of the economy.

The fiscal policy as set out in the programme aims at providing strong incentives to work and invest, but is rather vague in providing the private sector with incentives to save more. Lower corporate tax creates an additional incentive for investment, thereby increasing potential output, stimulating technology transfer and enhancing international competitiveness. Notwithstanding these merits, it is questionable that the tax cut should be fully self-financed and increase enterprises’ propensity to save. It is noteworthy, that the cut in profit tax was partly financed by postponing previously agreed reductions in the social security contribution rate, and the programme seems not to hold up the advantages of lower profit tax against the consequences of raising other revenues and cutting expenditure. Cutting expenditure aimed at preparing for EU accession could jeopardise Romania’s preparedness for membership and could eventually hamper the smooth integration into the internal market. Hence, a more gradual approach to

lowering the profit tax could have been envisaged, not least since the investment ratio has already grown rapidly over recent years, reaching 23.3% of GDP in 2004 according to the programme. Moreover, FDI has picked up considerably since 2003, and foreign investors seem not to be primarily concerned by the profit tax level, but rather by other shortcomings in the business environment, such as the functioning of the judiciary, regulatory stability, transparency and predictability of the tax administration, restrictive provisions in the Labour Code and some remaining discriminatory government interference.